ABSTRACT: Motivated by wide variation in patient outcomes, payers have implemented a broad range of initiatives aimed at improving the quality of surgical care. Common strategies include centers of excellence programs that steer patients to hospitals likely to have superior outcomes and pay-for- performance plans, which reward hospitals for compliance with targeted processes of care. Recently, several large payers have begun funding state- or regional level quality improvement (QI) collaboratives. While their details vary, these efforts generally involve collecting detailed clinical data regarding process and outcomes, regular feedback on provider performance, and explicit mechanisms for quality improvement. Early results from these large QI collaboratives indicate their potential to substantially improve patient outcomes. Nonetheless, wide dissemination of this model remains limited due to the high costs associated with data collection and program coordination which range from $50 to $200 per patient. However, many believe that savings associated with quality improvement may more than offset such costs. By some estimates, surgical complications add over $11,000 to the average payments for inpatient surgical procedures, most of which is passed on to payers. Wide variation in hospital payments further suggests opportunities for savings. Based on our pilot studies using claims from one large payer in Michigan, average total payments for CABG and other common procedures vary by more than $5,000 across hospitals, after accounting for contractual price differences. A large proportion of this variation is attributable to differences in non-bundled specialty services during the index admission and in 30-day readmission rates. If such variation could be reduced only moderately, quality improvement would not only cover its costs, but also substantially reduce the overall costs of surgical care. In exploring the financial implications of large QI collaboratives in surgery, we will examine data from the Value Partnership Program of Blue Cross and Blue Shield of Michigan (BCBSM), the most ambitious program of its type to date. This program involves more than 40 hospitals statewide, enrolls almost 50,000 patients annually, and costs over $10 million each year to administer. Its clinical scope is broad, including bariatric, cardiac, general, and vascular surgery, as well as percutaneous coronary and peripheral arterial interventions, thus providing a rich substrate for examining the relationship between quality improvement and costs.